Why 2012 Could Define McMoRan Exploration

For McMoRan Exploration (NYS: MMR) , the Gulf of Mexico was looking a bit uncertain a few months back. But now, it looks like this exploration and production company is back on track. The coming year could see a major production hike if Davy Jones well No. 1 performs as expected.

Now is a good time to check on how the stocks in your portfolio might shape up next year. A good knowledge of the opportunities and the challenges ahead for the company should help you make better investing decisions regarding its stock. McMoRan might even have a potential game-changing strategy on its hands.

A light at the end of the tunnel?The first Davy Jones well is expected to undergo flow tests this month as scheduled. I have a feeling this will turn out to be good news. The Wilcox cretaceous play, where the well is located, is said to contain an estimated 2 trillion to 6 trillion cubic feet equivalent (Tcfe) of reserves.

The Davy Jones well No. 2 is expected to finish in the second half of next year. Now that's what looks like a game changer. McMoRan's cumulative share from the two wells is a huge 3.2 Tcfe. With such reserves in hand, coupled with increasing production, the cost of production could come down significantly.

The big challengeIf management can curtail costs and bring them below the costs at which they sell natural gas, cash flows should see a big improvement. Ultra Petroleum (NYS: UPL) is proof of that. This natural gas producer ensured positive cash flows by pushing down production costs. The third quarter has already seen a narrowing of operating losses, which is a sign of improved operations and production levels.

However, I'm not expecting much from McMoRan's Lafitte ultra-deep prospect, though additional hydrocarbons have been discovered. With Energy XXI (NAS: EXXI) , too, having a working interest here, the company has been stubbornly maintaining that these reservoirs are capable of altering prevailing market conditions for natural gas.

Foolish bottom lineWith acquisitions from Plains Exploration & Production (NYS: PXP) last December, the company's got a long way to go in terms of development of assets. Capital expenditures have gone up due to these acquisitions in the last 12 months. But patience will be the key to holding this stock. To stay up to speed on the top news and analysis on McMoRan Exploration, you can start here by adding the company to your watchlist.

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